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Gold/Mining/Energy : Derlan (T.DRL) -- Ignore unavailable to you. Want to Upgrade?

To: edward harris who wrote (202)	5/26/1999 12:49:00 PM
From: Serge Collins	Read Replies (1) \| Respond to of 319

I wasn't referring to the assets being held for disposition, I was referring to other matters, which I'll get to in a minute. As far as the assets left, I doubt they will fetch anything near $80 million. Their semiconductor division is an albatross that nobody wants. Why? They basically only have one customer (Tokyo Electron) which is a fabless company, and Tokyo does not want to be in the business of producing semis. The door manufacturer (JV Rush) can't be worth that much as they do not own their production facility. Even if they get another $50 million for the remaining assets, they will still have a net debt position of over $50 million. The real sticking points are related to corporate matters. First of all, Dermot is the most overpaid CEO in North America. This guy hauls in over $500,000 a year, an extremely excessive sum of money for an incompetent manager. He also has 745,000 out-of-the-money options outstanding, and most of those have vested. The company also has provided a $5.1 million Letter of Credit to support a trust that guarantees his pension, which would pay him in excess of $100,000 a year for life. There is also the sticky matter of Director Indebtedness relating to a loan of over $2 million that was used to buy stock at $12.50. Dermot and two other directors to themselves owe almost $2 million and the stock they have set aside for collateral is worth about $300,000. They are liable for the rest. Obviously, these matters make it unlikely that they will agree to sell the company for less than $5 per share, but it's highly unlikely they could get more than this. They borrowed heavily a few years ago to buy assets that they are now selling at a loss, and the money they are receiving in return won't even put them in a positive cash position. Remember, any buyout has to include the assumption of debt. If you look at comparable aerospace companies, any price above $5 per share with the assumption of debt, would be a big premium. No one is going to pay a premium for a company as badly mismanaged as this one, with a management team that has earned a well deserved reputation for ineptness and padding their own pocketbook. It's worth holding a small position in Derlan to play the turnaround, but I wouldn't hold expecting a generous buyout. Just my opinion.